Haughey sought ‘preferential treatment’ for Ireland from US on tax
Appeals from then taoiseach made secretary of state James Baker feel ‘guilty’ for supporting Tax Reform Act
A 1989 US diplomatic cable noted that former taoiseach Charles Haughey’s objective for his meeting with US secretary of state James Baker was to discuss a new class of foreign corporations labelled in the Act as “Passive Foreign Investment Companies”. Photograph: Tom Lawlor
Charles Haughey sought “preferential treatment” for Ireland from the United States on taxation after an Act was introduced by the Reagan regime in the 1980s to close a loophole allowing companies to shift profits to tax shelters.
US diplomatic cables from 1989 suggest that the then taoiseach was keen for Ireland to be seen as a special case when it came to foreign investment by American firms, given the State’s reliance on them to generate employment.
A cable sent from the US embassy in Dublin to the office of the secretary of state, James Baker, ahead of Haughey’s visit to the US, made it clear that one of his objectives would be to “push the administration and Congress to give Ireland preferential treatment” under the 1986 tax reform Act.
The Act set out to lower tax rates for individual US citizens and make up the shortfall by eliminating billions of dollars worth of tax loopholes that were being exploited by, among others, firms with overseas subsidiaries.
Department of finance officials had noted that changes to the system had contributed to US firms repatriating, rather than reinvesting, profits made in Ireland at an unexpectedly high level in late 1988.
The cable notes Haughey’s objective for his meeting with Baker was to discuss a new class of foreign corporations labelled in the Act as “Passive Foreign Investment Companies”. These companies would not be permitted to take advantage of deferral on any of their income and were to be taxed each year in the US, even if they did not repatriate any profits.
There was also concern from the Irish side about a proposal in the Act on “super royalties”, which attempted to ensure that a US company which manufactured overseas was only entitled to a low profit by requiring it to pay the US parent firm for intangible benefits such as the technology underpinning a product.
A cable sent from the secretary of state’s office to the US embassy in Dublin following the meeting states that Haughey explained that US investment “provided employment for 38,000 people, accounted for 18 per cent of Irish industrial production and provided a 22 per cent return”.
“He [Haughey] said that unfortunately the 1986 Tax Reform Act’s provisions on super royalties and passive investments worked against keeping profits in Ireland where they could be reinvested,” the cable says. “He said that in considering this issue, US officials should take into account America’s $1 billion trade surplus with Ireland.”
The taoiseach’s arguing of his case seems to have worked, with the cable stating that Baker responded that he felt a “little guilty since he had shepherded the tax reform through Congress”.
Baker made a commitment that he would work with Irish ambassador Pádraic McKernan and advised Haughey to discuss the matter during his subsequent meeting with then US treasury secretary, Nicholas F Brady.
An earlier cable, sent from the US embassy in Dublin to the secretary of state’s office in January of 1989, shows the then minister for trade and commerce Ray Burke highlighted the potential damage the 1986 tax reform Act could do to Irish interests in a meeting with Democratic congressman Brian Donnelly.
“The US surplus with Ireland in 1988, about $1 billion, translated into about 27,000 jobs in the US, according to Irish officials,” the cable notes.
Donnelly told Burke of his efforts to amend the 1986 Act to exclude the definition on “passive foreign investment corporations” when it came to countries such as Ireland with which the US had a trade surplus. He said he expected his bill to be attached to other tax legislation some time in the summer or autumn of 1989.